Public Pensions: The Hidden Entitlement

For those who work in the private sector, the dream of enjoying a comfortable retirement has become just that — a dream.

The impact of the recession continues to be brutal, especially on younger workers whose career earnings may never recover. Of course life isn’t too pleasant older generations who will be forced to spend their golden years making up for lost earnings. A recent survey by CareerBuilder found that  “[m]ore than seven-in-ten (72 percent) workers over the age of 60 who said they are putting off their retirement are doing so because they can’t afford to retire.”

The government may be adding insult to injury. In addition to fears about affording their own retirement, private sector workers may be on the hook for funding the enormous shortfalls in public sector pension plans. The hidden bailout. The secret unfunded liability. Just how big a bill are we talking? Orin Kramer, chairman of New Jersey’s Investment Council, reports it could be as large as $2 trillion. Some would say even this is too small. Joshua Rauh, professor of finance at the Kellogg School of Management at Northwestern University, says pension funds use exaggerated assumptions to puff up their bottom lines. Rauh says that, “[o]ur calculation is that it’s more like $3 trillion underfunded.”

There are many nefarious reasons for the problem. The primary one is described by Diana Furchtgott-Roth, a fellow at the Manhattan Institute, who writes,

One reason for the unfunded liabilities is the increase in the financial power of public sector unions, such as the American Federation of State, County, and Municipal Employees and the Service Employees International Union. They contribute to the election campaigns of state legislators and governors and encourage them to raise public pensions.

This is easy to do because payouts come decades later, when the elected officials voting now also will be retired. Public sector unions gave $7 million in New York and $38 million in California in 2008.

In a slick game of hidden patronage, politicians are lining their campaign coffers by promising taxpayer money to pay public sector pensions. Since the fiscal red ink doesn’t show up on the budget books for a few decades, private sector voters don’t notice, and the union members fill the ballot box. Apparently nobody seemed to care about the long term.

California provides us with a prime example of how letting the public sector have control over their pensions can lead to fiscal implosion.

In a recently published article by the Howard Jarvis Taxpayers Association, the extent of this disparity was emphasized:

“Even though the cost to taxpayers for public employee retirement benefits has increased by 2000 percent from $150 million per year to over $3 billion over the last ten years, most in Sacramento (the state’s capitol) remain with their heads firmly planted in the sand. And if a $3 billion dollar shortfall does not seem like so much today, the future is revealed by a report released by Stanford University that shows California’s public retirement plans are underfunded by $535 billion. That is an estimated liability of about $36,000 per household.”

California is only one of the most egregious problems in a nation that is filled with them. Forinstance, four in five public sector workers have lifetime pensions, compared to only one in five in the private sector. Their average pension is also significantly more generous than the private sector. On average the public sector receives $13.65 worth of benefits per each hour they worked compared to $8.02 dollars for private sector workers. That means public sector workers receive 70% more in benefits. While public pensions promise more, it has led many of them to be underfunded – meaning that they do not have enough assets to pay off all the promises they have made. One significant cause of the problem is that public sector workers can generally retire earlier than in the private sector – usually age 55 – and still receive up to 90% of their income in pension. It is little wonder then that the average pension plan is 35%underfunded.

Taken out of the abstract and into the personal consider a recent Forbes story on Glenn Goss, a retired Florida police commander. Goss retired at age 42, after 21 years on the force. In his final year he earned $90,000. Using the typical formula, which factors in length of service and an average of his last several years worth of pay, Goss will draw $65,0000 annually in pensions. Again, he’s 42. As Forbes explains, “Given that the average man his age will live to 78, Goss is already worth nearly $2 million, based on the present value of his vested retirement benefits. Looked at another way, he is a $2 million liability to Florida taxpayers.”

This is an unsustainable system that should seem anger young adults. States are promising benefits to workers that they cannot possibly pay. Normally we would shout “reform!” But in the case of pensions this becomes tricky. Underfunded pensions are the legal obligations of the state and they must be paid. Many courts have already refused to allow states to reduce promised benefits or force increased contributions to current workers. In other words, state will have to look to future taxpayers to foot the bill. Young adults, who are having trouble even finding a job themselves, are unwittingly subsidizing public workers early retirements.

What can we do? Well first we must break the self-reinforcing cycle of political patronage between public sector unions and government. We must begin to elect conservatives committed to reducing the size of the public workforce and paying them a wage that is competitive with the private sector. Young adults must also begin to pressure legislators to make the pension crisis an issue. Government’s must stop thinking about what benefits them in the short term and start worrying about what hurts us in the long term. From this macro perspective lawmakers should begin to reduce benefit plans for new public employees. This does not mean undercutting their ability to retire comfortably, however, the retirement age as well as their benefit level should be brought in line with the private sector.

For too long the next generation has been the government’s reelection meal ticket. Public officials must be made to understand that if the next generation can’t afford it – then the government can’t afford it.

by Brandon Greife, Political Director of the College Republican National Committee